loan from 401k 1099r

[dukelillah]

I have a client who took out a loan against his 401k. He suffered an injury on the job. The employer disputed that it happened on the job and terminated him. consequently he received a 1099R, Code L.  However, the client sued his employer, and after 2 years, he was deemed injured on the job and awarded a lump sum payment determined by the date of his injury.  The outstanding loan reported on the 1099R was deducted from this payment.

Am I correct , after researching this issue, that my client will still have to claim the 1099R as income on his return for that year 2022, even though this year, 2024, he received a 1099R with the entire lump sum payment, net of the amount to pay off the loan reflected as nontaxable?  How can I lay out this entire situation to the IRS?

[SusanY1]

You are correct that as a cash basis taxpayer, your client owes tax on the income reported in 2022 and must claim that income in that year.  

However, it sounds as if your client may be eligible for a claim of right repayment.  More information about that can be found here What is claim of right repayment?